Funding for universities

The federal government is reviewing the ‘base funding’ for universities. The ‘Group of 8’ universities (of which Monash is one) have put out a couple of proposals for reform. The first is that there needs to be ‘partial deregulation’ of student fees.

Student contributions should be partially deregulated to allow students to invest more. This will create more diversity in the sector. A more diverse sector will better meet the needs of a broader cohort of students.

This is a good idea. At present domestic Australian students are effectively subsidized by international students. I have commented on this before. As a long term strategy in a competitive international education market, the cross subsidy will be not be viable. So if domestic students want a quality university education then either they have to contribute more themselves and/or the government has to contribute more from tax revenue. Partially deregulating student contributions (e.g. like in the UK, allowing Universities to raise fees subject to equity considerations) would be a good first step to long term sustainable university funding.

The other idea is to have a regulator oversee the student fees.

A partially deregulated system should be overseen by an independent pricing regulator, operating at ‘arm’s length’ from Government, but empowered to provide binding advice on the cost and appropriate level of funding. The Australian Competition and Consumer Commission (ACCC) may be a useful model for a higher education pricing regulator.

This idea is – well – not good! The last thing that the University system needs is a price regulator treating it like a monopoly sector. I am happy to give any VC who supports this proposal a free lesson in regulatory price setting. (I did lots of it at the ACCC and am still doing it as a part time member of the Economic Regulation Authority of WA).

Universities in Australia are not and do not need to be treated like monopolies. There are 39 universities in Australia and allowing them to compete on an open basis will lead to student fees based on cost and differentiation of product. So the outcome of the ‘base funding’ review should be a map towards increased competition between universities and less price control. Having a regulator set prices for undergraduate degrees makes little sense, even as a strategy for transition to a more deregulated tertiary market place.

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14 Responses to "Funding for universities"

This language is obviously silly:“Student contributions should be partially deregulated to allow students to invest more. This will create more diversity in the sector. A more diverse sector will better meet the needs of a broader cohort of students.”Allow. Invest. Diversity. I wish universities would be honest rather than use weasel words, or misuse ordinary words so that they become weasel words.
Who’s allowed to invest more? Rich students, or their parents. Those who have money, rather than necessarily those who have ability (there are obvious problems with ENTER scores, but there’s no need to make this worse by fee deregulation).
Why is this investing? Because we’re assuming education == investment. It is generally, but this is better recaptured by a progressive taxation system. Why should those people for whom educaiton is not an investment in personal wealth creation need to pay more to be educated (theoretically by a ‘better’ university)? Teachers, nurses, community workers etc are both essential and very unlikely to be retiring as multi-millionaires.
And how increasing the population of the wealthy and their children at Go8 universities is good for diversity is an exercise best left to the realms of fantasy.

Stephen – Obviously higher education doesn’t satisfy the theoretical conditions that might justify a price regulator as an economic agency, and I think the people suggesting this idea are well aware of that. The reason it is there is that the first-best policy of deregulation is politically unlikely (views like Alister’s are common), and so the risk is that we would fall back into the current system, of prices set through a quirky mix of history and politics, with reviews once every 20 or so years. The idea is that the regulator would introduce a credible and semi-rational element to price setting, with limited flexibility on top giving scope for product diversity.

Actually, Alistair certainly has a point in terms of students choosing to study for a profession motivated by service. Do we expect these to be subject to unregulated pricing?
Also given the non-financial motivations of students generally (in addition to those with social orientation) plus the price muffling effects of income contingent loans, is it correct to expect that this “market”is analagous to any other non-monopoly non-essential service?
And is it a bit simplistic also to assume that price will be determined totally by the “cost and differentiation of product”, to the extent by “differentiation”you exclude prestige and access to elite networks?
Could the previous question be relevant to the fact that this submission comes from the group of 8?
What might (complete) freedom of pricing have on the degree of equity of access to (particularly the group of 8) universities and, indirectly, to quality emplyment opportunities? What might the associated economic and social costs be?
I am certainly not expert or researched enough in this area to conclude that the inclusion of an independent regulator would be “net beneficial” but I am unconvinced by what to me seems like a shallow / narrow dismissal based on a shaky regulatory pricing axiom that reduces education to just another “product”
Perhaps, Stephen, you have satisfactory answers to all these questions and for the purposes of this blog are unable to list them due to space, but this article highlights to me the arrogant attitude of our profession that leads to intelectual laziness and dismissals (such as “I am happy to give any VC who supports this proposal a free lesson in regulatory price setting”) and ultimately self-marginalisation

The proposal isn’t that prices be unregulated, it is that they should be regulated by the market rather than the government. We already have three higher education markets: for international students, for most postgraduate students, and in private providers and TAFEs which offer full-fee undergraduate degrees. What we see in these markets is a wide range of price points, from in some cases below what universities get for a Commonwealth-supported place to way above.
The effects of soft loans on pricing is an issue – some initial work on this a few years ago did not find much effect, but it should be examined again. However the maximum student loan also acts as a de facto price cap, as taking course fees above it substantially reduces the potential market.
To date all the evidence suggests that low SES students make the same calculations as other students, given their prior academic performance. This is in the context of lower fees that would exist under deregulation; on the other hand the assumption that the pool of low SES students eligible for uni entry share the irrationality and short-sightedness observed in other low SES populations seems to be wrong. By having completed year 12 and done well they have already showed that they are different.

“The proposal isn’t that prices be unregulated, it is that they should be regulated by the market rather than the government.”Sorry Andrew but petty semantic dismissals like this just add to my point about economics risking becoming an intellectually lazy, self-marginalised and arrogant profession. It was clear what I meant by “regulated” and it was clear that I was questioning the axiomatic assumption of the “markets” ability, given the features of the “product”, to best regulate the HED UG prices
“However the maximum student loan also acts as a de facto price cap, as taking course fees above it substantially reduces the potential market.”So firstly if I am correct that “soft loans”largely muffle the price signal, if it is within the bound of the cap, this has no relevance on this concern.To the extent Unis are allowed to price above the cap, then, well, we are in the undeniable area of equity impacts...
“What we see in these markets is a wide range of price points, from in some cases below what universities get for a Commonwealth-supported place to way above.”
“The effects of soft loans on pricing is an issue – some initial work on this a few years ago did not find much effect, but it should be examined again.”
“To date all the evidence suggests……”Are you able to provide links to these assertions?
“This is in the context of lower fees that would exist under deregulation”I simply do not buy this at all. I do not believe that there will be significant price competition in a deregulated undergrad market. In fact I suspect that, given the effects of “soft loans” and the nature of the “product”it is more likely that demand will be sloping upwards with price at current regulated levels, signalling quality

Matt
There is evidence of differentiation and competition in the graduate program market. In graduate studies Universities compete through fees and course innovation. For example, fees for MBA’s range from under $15,000 to over $50,000. A link is at:http://www.mbaaustralia.org/mba-fees-in-australia.htm
I would suggest care as the Monash figure is out of date so some of the others may be as well. Also the course length is not stated and this differs from 1 to 2 years. But this reflects the differentiation.
There is strong competition through marketing and promotion. Evidence – look at last Monday’s AFR with an MBA centre spread (you will see me ‘leaping out of the page’ and more sedate pictures of my competitor Deans). There is a lot of advertising and marketing effort in the MBA (e.g. the rankings ‘competition’ that occurs continuously, the rivalry for accreditation).
The market does have ‘soft loans’ up to a cap. Interestingly, the course fees are not pushed anywhere near the cap, so while the HELP scheme may increase demand, the prices are moderated by competition.
Would competition and differentiation be as strong in the undergraduate market? I suspect so. 39 Universities competing head to head is a level of competition that consumers dream of in other parts of the Australian economy.

I agree with you Stephen – particularly as your argument pertains to the subject areas we know very well (business, economics etc).

There is an obvious difference in the earning potential students have in other subject areas and obviously a one size fits all approach to business, on the one hand, and e.g. nursing on the other hand is not quite the right approach. However these differences are already catered for by the government with different levels of govt financial support for different programs.

There seems no reason why this could not continue in a deregulated environment. What we would see is that students’ expected earnings would obviously have an effect on their willingness to pay for a degree in some areas and that therefore competition in these markets would serve to ensure prices did not rise beyond what students would pay. Provided the government support was sufficient to make it worth it for a university to offer the course at all, then there should be no difficulty.

However Alister, Matt et al, it is very important to realise that currently the government subsidies plus the maximum student contributions allowed to be charged for business and law (in particular) are laughably, ludicrously less than the actual cost to the University of these degrees. Stephen’s post is aimed at trying to find ways to combat this problem because international students aren’t going to be there to foot the bill forever. This is a very real worry for Deans and VCs, not something manufactured because they want to put prices up.

For the government to pick up the tab would mean raising funding substantially (think double). In the current climate, the political will doesn’t appear to be there to spend that amount of money. So what to do? Ask students in other areas to subsidise business or law students (I can see that going down like a lead balloon)? Running average class sizes of 600 instead of 300? Things could get ugly. Suggestions such as Stephen’s may be a way to save some Universities from financial ruin. A situation that none of us wants is for some Universities to actually fold because they can’t make ends meet. That is one way that education could rapidly become extremely elitist with far fewer places available.

I would personally add that I think a Uni sector with deregulated prices could do quite well if accompanied by a comprehensive govt scholarship program targeted in two main areas: students from educationally disadvantaged backgrounds (usually defined by the level of parental education and wealth) and students choosing to go into fields with high social returns but low personal returns (e.g. teaching and nursing).

Matt – There are references to some of the research on socieconomic effects in the University of Melbourne submission to the funding review: http://www.unimelb.edu.au/publications/docs/uom-base-funding-submission-2011.pdf It’s quite long so I suggest you do a word search on ‘socioeconomic’. The work on fees and soft loans was never published because the evidence wasn’t strong enough to come to a conclusion either way (this was only two years after FEE-HELP started). Though one interesting thing I have noticed in more recent fee data (without doing a systematic check of inflation over time) is that international full-fee students are typically charged more than domestic full-fee students for the same course. Given that the domestics have a soft loan, that is contrary to what we would predict if the soft loans are inflationary.

Stephen, I am not surprised that the market for MBAs demonstrates differntiation and competition. As an economist I would, at face value, be concerned if someone suggested economic regulation of the MBA market.
I do not agree that it is at all a credibly “pilot” for a UG deregulation.
-it is unambigously an instrumental training /education undertaken for career advancement….many UG courses are undertaken in persuit in careers where financial return is self-evidently a low priority
-given most people studying them the impact of “soft loans” would be significantly be reduced by the fact that perhaps most of those undertaking them are all ready earning above the repayment threshold (some well above). 18 YOs on the other hand are several years of unknown number away from even starting to repay their loans back
-People undertaking it are generally much older / more mature than UG’s. I suspect they are better able to assess information and more likely to make “rational” decisions
-UGs (school leavers who still make up a solid majority of entrants in most courses) are more likely to be influenced by where their friends are going, where their parents went or want them to go, at a University close to home given many are still “dependent” (or alternatively the cost of living away from home need to be added to consideration of most (and for some all) of the other 38 universities
Jenny, I don’t think you understand where I am coming from. I have no doubt our university funding and pricing model needs serious reform – i am contesting what appears to be a conclusion based on flawed premises (and there is no way UG spots are underfunded by half – that is absurd. In fact the link Andrew provides to UM’s submission suggests it is less than 10%)
Andrew, the socio-economic related component in that submission relates purely to academic outcomes, resource requirement etc…my original argument is that unregulated pricing (explicitly not UofM’s recommendation) could potentially result in poorer participation rates at elite unis / high demand courses.

Apologies Andrew, have read section 5.5 which points to empirical research that suggests no adverse participation effects of students from lower socieconomic backgrounds from price increases with ICLs
Note that of course this would not hold if fees were set above any ICL cap

On the pure teaching costs (ie about 7 months of year the year) I don’t think undergraduate places are on average under-funded if we think current class sizes are ok, though there are certainly some major issues at the discipline level. This is why in a competitive market I think that though there will be price increases, there will also be courses around current cost levels (assuming no major change in public subsidy).

The funding issues come because unis are integrated teaching-research institutions, andwhere unis break from the standard model of large classes. Economies of scale are crucial, and when you can’t for various reasons get them (eg too little demand, teaching methods that don’t work for large groups, regulatory requirements) financial trouble is the result.

Matt – just to clarify, I don’t mean that across the board UG are underfunded by half. But in business/law based on the data I have on input costs (and this does assume that you’re going to use full-time well qualified professors to teach rather than PhD students) including all the costs of running the place (lights, security, library, student services, databases, IT systems – the whole lot) then these disciplines are way underfunded. I estimated half. Obviously this is very sensitive to class sizes so somewhere running average class sizes of 100 are going to be facing very different costs than somewhere running average class sizes of 200. Nevertheless for any sort of reasonable education, there has to be some choice of subjects and normally that means that at least at the third year level a whole bunch of subjects will need to be offered that have relatively smaller class sizes.

But there’s another interesting question here: should business/law students have to sit in mega class sizes because the government does not allow them to pay more in order to be in smaller rooms with more personalised attention?

No Jenny, they shouldn’t. Again, I think that UG funding and pricing undoubtedly needs reform. I also believe that there are gains, (perhaps including in the diversity and quality of the options available to business and law students!) to be had in liberalising student fee .
My contention was the assumption that any independent regulation of this is axiomatically bad because the ‘market” for UG degrees is not monopolistic
These concerns are not even close to being fully addressed. There has been scant empirical evidence provided and the presumptious theorising smacks of ideological convenience
The market for UG degrees does not even closely resemble that of, say, meat, beer or bread! It is intellectually dishonest or lazy to suggest it does!

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